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Does PE still have a taste for European fashion?

·4 min read

Private equity poured just over $7.4 billion into European apparel companies last year, but dealmaking has fallen in recent months as the industry grapples with both economic uncertainty and changing consumer habits.

So far in 2022, there have only been a handful of deals. Among them is Parabellum Investments' acquisition of luxury fashion retailer Hervia. More recently, it was revealed that L Catteron is seeking a buyer for Danish fashion brand Ganni, a deal that could value the business at $700 million. Other PE deals have been abandoned, the most notable being Sycamore Partners' bid for iconic British label Ted Baker.
   
The barrage of headwinds impacting the fashion industry has perhaps never been greater. Inflation and ongoing supply-chain disruption have increased the cost of raw materials; meanwhile, consumer confidence is yet to return to pre-pandemic levels. Additionally, the industry is going through profound structural changes shaped by the growth of ecommerce and new technology.
 
Nevertheless, investors see opportunities to create value with European fashion brands, provided strong brands are able to tap into long-term trends.

"We only invest behind distinctive bands that we think are beneficiaries of what we call structural long-term dynamics," said Tara Alhadeff, a partner at Permira. "For instance, the casualization of what people wear. This isn't fashion, it is more people's behavior."

Alhadeff sits on the board of shoe brand Dr. Martens, which became one of Europe's biggest fashion exits last year when it held its £3.7 billion (about $4.5 billion) IPO Jan. 28. Permira, which executed a partial exit, originally invested $519.8 million in the brand in 2014. Alhadeff notes that Permira was tapping into a shift toward casual attire. While this change has arguably benefited some brands, it has negatively impacted others.

Indeed, there are examples of high-end brands that have struggled. In March, luxury shirt-maker TM Lewin—which was bought out of administration in 2020 by Stonebridge Private Equity-backed Torque Brands—went bankrupt. The company, acquired in April by its main lender Petra Group, had to close all 66 of its physical locations.

Ted Baker, meanwhile, is still seeking a new owner since launching a sale in April. The label, which has seen its shares fall by over 90% in five years, had reportedly two potential buyers walk away in as many months: Sycamore, in May, and Reebok owner Authentic Brands, in June. While Ted Baker saw its sales increase by 20.5% in its 2022 financial year and narrowed its losses to £44.1 million from £107.7 million the previous year, revenue is yet to return to pre-pandemic levels.

"Ted Baker is a strong brand, but it sits in a middle ground between luxury and affordable fast fashion where it can be difficult for consumers to differentiate what the brand stands for versus competing brands," said Matt Wiseman, a partner with mid-market investor Alantra.

He notes that the emergence of fast fashion operators has come to the detriment of established brands, with consumers increasingly going online for inexpensive apparel mass-produced in response to short-lived trends.
  Off the rack and online Many of these operators will have a predominantly, sometime exclusively, online presence. One of the prominent players in the fast-fashion space is UK-listed Boohoo. The company has acquired a string of well-established highstreet brands, minus their brick-and-mortar operations.

In February 2021, it sealed a deal to buy a portfolio of brands following the collapse of Arcadia Group that included Dorothy Perkins, Burton and Wallis—the deal did not include 214 physical stores. A month prior it  picked up 242 year-old retail group Debenhams in a deal that similarly excluded 118 physical stores.

Boohoo is not the only online retailer that has sought to roll up legacy brands. Around the same time Boohoo secured its Arcadia deal, online UK-listed fashion retailer, Asos, paid £265 million for another basket of Arcadia brands that included its flagship brand, Topshop.

With this trend toward predominantly online presences, the potential for developing and improving appropriate distribution channels is increasingly a priority for investors.

"We ask ourselves questions like 'How much does this product lend itself to being sold online?'" said Alhadeff. "Brands can be behind on this, but we would still consider investing because we can bring this capability to them to help create value."

Some brands are more suited to ecommerce than others. Permira's Alhadeff points to another of her firm's portfolio companies, Golden Goose, as an example. The Italian high-end sneaker-maker, which was bought for €1.28 billion (about $1.31 billion) in 2020, lends itself to online channels more than, for example, a company selling high-heeled shoes, where fit is a much more common problem. Similarly, Alantra's Wiseman noted the value is finding the right channel for the right product.

"Before COVID, there was already a trend towards that bifurcation of channels story, with either companies using third-party, brick-and-mortar retailers or having an online channel plus their own stores, which enables direct engagement with consumers."

Featured image by Ming Yeung/Getty Images

This article originally appeared on PitchBook News